An unfortunate reality of the construction industry is the difficulty of managing their cash flow and getting paid on time. In a sector responsible for 6% of UK GDP, these cash flow gaps can have far-reaching consequences for the economy. Guest writer Nick Levine weighs in on what could solve this pernicious problem, and get the cash flowing again.
Nowhere is the problem of cash flow in construction more evident than with the fallout from the collapse of Carillion, which has caused cash flow gaps to reverberate around the economy since the beginning of the year. The problem is serious enough that the government recently appointed a Small Business Commissioner whose remit solely consists of remedying this issue.
A solution to cash flow gaps in the construction industry would be a serious salve for the economy. We argue that beyond policy, this problem requires system-wide changes; the salve could come in the form of cloud accounting technology, which creates a unique opportunity for construction companies to improve efficiency and to better manage collection of payments, alongside access to finance to cover cash flow gaps.
Why Are Late Payments So Common In The Industry?
Late payments are a particular problem in construction due to the sector having such a long supply chain, consisting of specialists and subcontractors.
This means that it can take time for subcontractors to get paid due to payment needing to pass through a number of different parties to reach them. It is estimated that Carillion owed payments to up to 30,000 businesses, of around £1 billion at the time of its collapse(i).
“If a client doesn’t pay his subcontractors on time each week they will often walk off site and look for work elsewhere. It can then be very difficult to get that labour back, which in turn affects the ability to deliver client work on time.” -Mark Telford, Director of Telfords Chartered Accountants, a firm which specialises in the construction industry
“I always send a reminder out straight away when invoices are late. However, some clients aren’t on the ball and often delay payment by a few weeks. This has knock on effects for cash flow in the business.” – Colin Kent, owner of Pembrokeshire based CK Roofing Contractors Ltd, who issues all his invoices on 30-day terms.
Cloud Accounting Software And Payment Add Ons Can Speed Up Payments
In the meantime, there may be opportunities closer to home to solve these problems. The development of cloud accounting software such as Xero and Quickbooks, alongside an ecosystem of add on partners, make it relatively easy for construction companies to access up-to-date information on their finances, as well as giving them tools to facilitate faster payment and issue invoices.
“We encourage our clients to get their clients to pay by direct debit. GoCardless and iZettle have revolutionised the way in which small businesses can improve their cash flow” – Mark Telford
The benefit of using these tools is to be able to issue invoices and collect payment on the go, whilst on a job as opposed to retrospective billing.
As well as improving cash flow these tools can significantly reduce the time spent on credit control.
Easy Access To Finance Can Plug Cash Gaps Caused By Late Payers
A number of debt finance providers now also integrate directly with cloud accounting software, which makes it fast and hassle-free for construction companies to access finance to cover late payments.
Revolving credit facilities, such as iwoca, are similar to overdrafts in that they allow business owners to just pay fees on what is borrowed.
Robert Bailey of Swallow Hill Homes, a company which converts historic buildings into residential properties, uses iwoca to draw down on what he needs to pay on a daily basis.
He lists its key benefit as the “money arriving straight away” into his bank account. This then allows him to log onto his business banking and have adequate funds to set up payments for his suppliers.
Construction companies shouldn’t wait for changes to public policy to reduce late payments, and instead should be encouraged to take take advantage of advances in cloud accounting software to manage their day to day finances and reduce the time they spend on chasing invoices. When the next Carillion collapses, we can all be better prepared.
Author Credit: Nick Levine is the advisory lead at the high growth SME division of a Big 4 Accounting firm. He is a also a freelance journalist specialising in business and technology, and has written for a number of publications including Wired, Economia and The Times.
- i) The Telegraph, Carillion could owe supply chain £1bn as up to 30,000 businesses face financial hardship, Rhiannon Curry.